But when should it take effect? You may choose to make your POA effective immediately upon the date of signing or only upon your incapacity. Which is the better option?
If you're like most people, your first response is to say you only want the POA to be effective upon incapacity. After all, why do you need for someone to be able to manage your finances right now, while you're competent to manage them yourself? Isn't that a great deal of trust and power to place in a person when the need might not yet exist?
Yet, after discussion with me, most clients choose to make their POA effective immediately instead. Why?
The important thing to remember about POAs is that they are only valuable if a bank or other institution will accept them. And financial institutions aren't obligated to accept POAs except in very limited circumstances (such as a military servicemember on active duty). That is, they may choose to accept a POA or refuse to accept it.
And if you're a bank, your primary concern is limiting your liability. You don't want to accept a POA and allow the named agent to access the account (and, perhaps transfer all of its assets away) only to have the account holder come in the next day complaining that the person didn't have authority.
Keeping that in mind, consider the bank's viewpoint if your named agent shows up with a POA which says it is effective only upon your incapacity. Now your agent may have to bring in a letter from the doctor stating that you are incapacitated. Easy enough if you're in a coma, maybe, and your incapacity is clear-cut. But what if, say, you have dementia or some other progressive disease for which the crossing of that capacity threshold is less clear? Now the requirement for proof of incapacity may significantly limit your agent's ability to help you when you may still present as capable but really lack the ability to manage your finances. The effect is that if the POA is only effective upon incapacity, your agent may need to get a court order to establish your incapacity, which robs the POA of its convenience and cost-saving features.
A comment I have heard a few times is "I don't want someone to have access to my accounts now, they could clean me out!" However, if you don't trust this person while you are competent and healthy, why would you want to entrust them with such power over your finances when you lack the mental competence to understand or oversee what they are doing? If trust is an issue, you need to select a different agent.
To sum up, making your POA effective immediately increases its likelihood of acceptance and makes it easier for your agent to act on your behalf. Needless to say, since the agent will have a great deal of power he or she should be someone you trust closely.
No one wants to imagine someone else managing their finances. Yet the question isn't whether someone will manage your finances in the event of need, but whether that person will be someone YOU chose in advance or someone the Court appoints on your behalf. When you execute a POA you are in the driver's seat. You can choose your agent and make it as easy and inexpensive as possible for him or her to act on your behalf.
Incidentally, this issue is an excellent example of the difference between a professionally-prepared estate plan and a DIY plan. It sounds like a straightforward question, but it's one where a little discussion can make a big difference.